Facebook Swings to Profit, as Mobile and Local Ads Surge

Facebook swung to a profit in the second quarter, as sales rose 53% to $1.81 billion, pushing the stock up about 19% after-hours trading.

The company said its mobile business made $656 million in sales, or 41% of its advertising business, a step up of 11 percentage points from the prior quarter.

The company recorded a profit of $333 million, or 13 cents a share, surpassing analyst expectations on the top and bottom line.

Analysts were expecting sales to grow 37% to $1.62 billion.

“I’m very pleased with the results,” CEO Mark Zuckerberg said on a call with analysts.

The big beat indicates that Facebook is beginning to make headway as it tries to become what Zuckerberg has called, a “mobile best” company. Since going public last May, the stock has floundered, amid persistent concerns that Facebook would not be able to offset the attrition in its desktop sales business and thrive in the mobile market. The second quarter report card was essentially a statement by Facebook that it is doing better than many investors might think.

“The investments we’ve been making over the past year or longer are starting to pay off,” said David Ebersman, Facebook’s chief financial officer, in an interview on Wednesday.

There were no signs of fatigue with the service among users: Facebook’s count of daily active users rose 27% from the year ago period to 699 million. The number of monthly active users jumped 21% over the period to 1.15 billion.

In its earnings release, Facebook also highlighted that it surpassed 1 million active advertisers, propelled by gains in local business advertising. The emphasis on local indicates that Facebook’s sales force is ramping up efforts to woo small businesses, which will be especially critical, as it tries to become an engine to discover local businesses and services through its mobile application.

“The revenue beat is huge,” said Michael Pachter, a Wedbush Securities analyst. “They are clearly doing a great job with local ad sales.”

In recent quarters, Facebook has been cranking up the heat on its mobile ad business, releasing a flurry of new ad products and targeting tools for advertisers. For instance, mobile app install ads — or ads on Facebook that promote the download of third party apps — were one of the positive drivers of Facebook’s results.

The product, which was rolled out in the fall of last year, is gaining in popularity as Facebook tries to position itself as the app discovery portal for mobile devices. App discovery is a particularly vexing problem for developers, who are desperately trying to stand out in the crowded sea of apps. During the earnings call, COO Sheryl Sandberg described the product’s as “growing very rapidly.”

Facebook also made moves in the quarter to shore up its relationship with advertisers and make it easier for them to buy ads directly. In tJune, Facebook reformatted its ad business by simplifying its offerings and creating a more automated process around brands’ basic objectives. Previously, advertisers had to sort through a menu of some 27 different ad formats. Sandberg said the simplification of its ad products boosted Facebook’s local advertising results.

For some aspects of Facebook’s mobile ambitions, however, the second quarter brought mixed results.

Facebook maintained an aggressive cadence of releasing new products, debuting video on Instagram and releasing Home, an application for Google Inc.’s Android phones. The heavily touted Home app, which was promoted with a slick television ad and introduced by Zuckerberg, has fallen short of expectations amid complaints from consumers and relatively modest download numbers.

Facebook is still spending a lot to ramp up its mobile business. The company’s cost and expenses came in at $1.25 billion in the second quarter, less than a year ago, when it spent $1.93 billion. But last year’s results was bogged down by expenses related to compensating its employees with stock tied to its IPO.

Despite strides on mobile, Facebook still only accounts for a small slice of the greater digital advertising market. It is just 4.1% of the $104 billion market, according to data from eMarketer.

Note: An earlier version of this post said Facebook made $562 million in profit. The company made $562 million in income from operations and $333 in net income.